Hot Spots: Brazil

Hot Spots: Brazil

Article excerpt

Following an initial love affair with President Luiz Inacio Lula da Silva, whose economic policies turned out to be encouragingly more conservative than many had feared, the financial markets have become volatile of late. Their worry is no longer that Lula and his Left-leaning Brazilian Workers' party will destroy, with a rash of populist measures, the country's good relationship with the IMF and other foreign lenders and will demolish its ability to service the staggering public sector debt of some USD 400 billion, of which a large portion (roughly 40%) is dollar-denominated. The main fear now is that the government does not have the political clout to get critical legislation through Congress.

The concern is understandable. Even though the Central Bank has started to cut interest rates, the prevailing levels are still much too high for comfort. Following the latest lowering, the benchmark overnight Selic rate is at 24.5%, or 6.5 percentage points above year-ago levels. Inflation has been receding. It was clocked at 16.6% for the year through July, and the Central Bank's forecast of an annual rate of 10.2% by end-2003 looks realistic. To boot, the real's exchange market performance has strengthened to the point where the unit is now, even after a few setbacks, still trading roughly 17% higher than at the beginning of this year. In order to be able to cut interest rates further without hurting the real, however, the authorities need to do their utmost to preserve the confidence of investors and creditors. And this means that they have to get parliament to cooperate on reforms that are critical for stabilizing the nation's finances.

Fortunately, President Lula continues to surprise those who say that he cannot prevail against growing domestic pressures for an end to austerity and for a massive increase in social spending. In a crucial first vote in the Lower House of Congress on a bill to overhaul the horribly deficit-ridden social security system and to pare the excessive pension rights of certain civil servants and members of the military, he marshaled 358 votes in favor of the legislation, while only 126 MPs voted against it and there were 9 abstentions. In a second straight overnight session a clay later, the government triumphed in preserving the most important element of the pension bill, an 11% tax on retired public sector workers getting more than USD 400 a month.

This is quite remarkable, because the government is based on a fragile coalition of ten parties that together control only an estimated 254 of the 513 seats in the Lower House. Lula needed a two-thirds majority to get the pensions bill through, and he was facing strong opposition from workers in the public sector and from the far-left of his own parry. Compromises on certain aspects of the legislation had to be made, of course, but this should not diminish the impression of a politically astute Lula who is quite capable of forging the ad-hoc alliances he needs in parliament to get his program approved. It offers grounds for optimism on other important legislation currently making its way through the mill. This includes a bankruptcy reform bill that will have far-reaching consequences by making it easier for creditors to collect on debt.

In one of its key provisions, it caps the currently unlimited claims workers can make against companies in bankruptcy. The ceiling is envisioned at 36,000 reals: equivalent to about USD 12,000. Current bankruptcy laws, which date back to the early 1950s, concentrate mainly on protecting workers and do not accord equal treatment to bank lenders or other creditors. …